As a start-up, sourcing funds for your business may seem daunting as bank loans are often difficult to obtain with just a business idea and no tangible assets. But, there are other ways.
Here is a basic overview of the various stages and sources of funding that you might want to consider as a start-up. However, keep in mind that, naturally, each start-up is different which means that everyone’s journey towards a mature business will greatly depend on its individual characteristics.
There are two basic types of sources of funding for start-ups: internally (using your own funds) or externally (through investors).
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Internal funding is generally known as bootstrapping (link to Dictionary). This is when a start-up sources its initial funds from the founder’s own personal funds, from friends and family or from the revenue gained from the business. This process could also be called ‘growing organically.’
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External funding occurs where investors provide money to a start-up for some proportion of ownership (equity) in the business. Generally, there are different stages of funding available depending on the amount of money you want to receive and the point at which your start-up is at.
1) Early stages (includes pre-seed, seed or angel investing)
If you have initial ideas, are still developing products or your business is not fully operational yet
Pre-seed Funding: 0-10% equity, approx. less than $600 000
Pre-seed funding occurs at the very early stages of a start-up, that is, where an idea for a product has not yet been finalised. This is often provided by angel investors (possibly hyperlink to Dictionary or Raise Money Tab?). This type of funding is generally less than $600 000 ($500 000 USD) in value or 0-10% of equity.
The Pre-seed stage is a relatively new concept in the entrepreneurial space. Due to the increasing amounts of money (more than $1 mil) that have been granted under seed funding, the pre-seed stage has emerged to give financial access to smaller start-ups who may be excluded under seed funding.
Seed Funding: 5-25% equity, approx. $600 000-$1 mil
Seed funding is the money that a start-up may receive before it is commercialised. At this initial stage, basic research may have been conducted but there may not be a concrete business plan or idea. Seed funding is then usually a small amount of money received by a start-up to continue to develop the product, perform market research, evaluate business potential and investigate other parts of the business idea. These funds are often provided by either angel investors or early stage seed venture capital (VC). This is usually around $600 000 - $1 mil or 5-25% of equity.
2) Expansion (includes early expansion, expansion or late expansion)
If you have developed product(s), entered the market and significant revenue growth approaching profitable operating levels
At this stage of financing, the start-up has generally introduced their product into the market and has begun to generate revenue. Based on how mature the start-up is, it may be eligible for a range of funding from venture capitals or certain angel investors. A start-up usually receives Series A funding from venture capitals first and may receive subsequent Series B and Series C funding when it continues to scale and requires additional capital.
Series A Funding: 15-25% of equity
Series A funding describes the first investment that a venture capital makes in a start-up. This type of financing usually occurs after seed funding. It is generally given to start-ups when it is creating some revenue but not yet generating net profit. Venture capitals or angel investors usually provide Series A funding in return for equity or convertible debt depending on your negotiation with them.
Series B Funding and further:
After your first venture capital funding, you might be able to receive additional funding when you wish to grow your business further. The amount of equity that the venture capital might receive in return is usually based on your negotiations with the venture capital. It is usually extremely rare for a start-up to receive more than two rounds of venture capital funding.
3) Later Possible Options
If you are a mature business that wants to sell
After your company has developed into a mature business, you may want to sell to get a return from your initial investments or to provide a return to venture capitalists on their investments. This may be in the form of an Initial Public Offering (IPO). Another reason for an IPO may be to raise money quickly to continue to fund additional business growth.
More Information and Opinions on Stages of Funding
If you want further information or different ways of looking at stages of funding for start-ups
Generally:
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Excellent overview of the venture capital investment landscape in Australia and useful tips on how to obtain funding: Logan Merrick, The Secret To Acquiring Venture Capital Investment (2015) Buzinga <http://www.buzinga.com.au/buzz/venture-capital-australia/>
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Latest opinions, news and information on finance for start-ups and entrepreneurial business generally: https://www.entrepreneur.com/topic/finance
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A comprehensive and useful overview on why you should seek external funding and how it works: Anna Vital, How Funding Works – Splitting the Equity Pie with Investors (2013) Funders and Founders <http://fundersandfounders.com/how-funding-works-splitting-equity/>
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Tim Burd, Startup Capital: 6 Ways to Fund your Businesses (2016) Entrepreneur <https://www.entrepreneur.com/article/270373>
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Don Hofstrand, Financing Stages for Start-ups (2013) Iowa State University <http://www.extension.iastate.edu/agdm/wholefarm/html/c5-91.html>
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Greater detail on a wider range of funding options including incubators, government grants etc.: Business Funding Options for Startups, iPitch <http://www.ipitch.com.au/business-funding>
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Blog entry on recent trends in the entrepreneurial space with respect to funding:
Manu Kumar, The New Venture Landscape (2014) K9 Ventures <http://www.k9ventures.com/blog/2014/04/10/new-venture-landscape/>
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Simple overview on stages of funding: Rob Kelly, Here Are The 5 Major Stages of Startup Funding (2010) <http://robdkelly.com/blog/fundraising/5-stages-of-startup-funding/>
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Explanatory notes on venture capital landscape in Australia: Australian Bureau of Statistics, Venture Capital and Later Stage Private Equity, Australia (2012) <http://www.abs.gov.au/ausstats/abs@.nsf/Lookup/5678.0Explanatory+Notes12011-12>
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Oresund StartUps, What is a StartUp (2016)<http://oresundstartups.com/definition-of-startup/>
Pre-seed & seed funding:
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Ali Hamed, What is pre-seed investing? How did it all get started? What does it mean now? (2015) The StartUp <https://medium.com/swlh/what-is-pre-seed-investing-how-did-it-all-get-started-what-does-it-mean-now-4dc49b469bdc#.qzngc08fb>
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Alyson Shontell, These investors will give you $500 000 for a startup idea sketched on a napkin – no product needed (2015) Business Insider Australia <http://www.businessinsider.com.au/pre-seed-investors-look-to-fund-smart-people-with-startup-ideas-2015-4 >
Expansion financing:
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Latest opinions, news and information on expansion financing: Entrepreneur <https://www.entrepreneur.com/topic/expansion>
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Advice and support on growing your business: Growing your business – Checklist (2015) Australian Government, Department of Industry, Innovation and Science <http://www.business.gov.au/Documents/GrowingyourbusinessChecklist.pdf>
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Mark Henricks, How to Find Expansion Financing (2005) Entrepreneur <http://www.entrepreneur.com/article/81384>
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Paula Andruss, 6 Signs Your Startup is Ready to Expand (2014) Entrepreneur <https://www.entrepreneur.com/article/233231>
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Pros and Cons of Business Growth, Queensland Government <https://www.business.qld.gov.au/business/business-improvement/ways-grow-business/growing-quickly>
Initial Public Offering (IPOs):
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IPO Basics Tutorial, Investopedia <http://www.investopedia.com/university/ipo/>
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Conner Forrest, Startups: How to know when it’s time to IPO (2014) TechRepublic <http://www.techrepublic.com/article/startups-how-to-know-when-its-time-to-ipo/>
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How IPOs work and the upsides and downsides of IPO: Ameen Khwaja, The Ins and Outs of IPOs, Entrepreneur <https://www.entrepreneur.com/article/52826>
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Elizabeth Wasserman, How to Prepare a Company for an Initial Public Offering (2010) Inc. <http://www.inc.com/guides/preparing-for-initial-public-offering.html>